(29 October 2019 ) DAILY MARKET BRIEF 1:Fed FOMC should weaken USD

It seems that nothing is much of a surprise according to market participants’ view which are betting on a third Fed rate cut tomorrow, in line with last week soft ECB meeting amid Mario Draghi’s departure. Yet we would temper the view considering the strong dissent of a good part of policymakers following the September rate decision as well as Fed Governor Powell “mid-cycle adjustment” comment in July rather than stating a rate reduction cycle. Without mentioning the contradicting Markit and ISM manufacturing activity data, it looks like the September job report confirms solid growth in 2H 2019 although inflation shows slight weakness. As a result, the prospect for further rate reduction in 2020 is limited, although the latter would be accommodating given the budget deficit in 2019. A rate cut confirmed on Wednesday would be a negative event for the greenback.

Given the latest release of the US government's 2019 budget, which will close at $984 billion, the largest budget deficit in seven years and the fourth widening budget deficit due to increased spending and interest payments on debt, it appears that a rate cut would make the government business amid a $22.72 trillion debt pile as of September 2019. Meanwhile, a 0.25 percentage point drop in the Fed Funds Rate appears to be priced with a probability of 92% (61.50% as of early October). Core PCE due tomorrow as well as the October job report on Friday would have an incidence on the Fed decision. We would therefore consider that a rate cut decision would favor USD weakness due to further dovishness and carry trade strategy adjustments, whereby the CAD, for instance, would gain significant advantage due to higher rates.

By Vincent Mivelaz